Atlanta Fed's Guynn: Rates Likely to Rise

WASHINGTON – The Federal Reserve (search) is not yet done raising interest rates, but the central bank will watch economic data closely in an uncertain time for monetary policy, Atlanta Federal Reserve Bank President Jack Guynn (search) said on Wednesday.

"Given the current outlook for the economy, my personal view is that we've not yet reached a neutral policy stance," Guynn said in prepared remarks to the Certified Professional Home Builders (search) in Atlanta. The Fed released a text of his speech in Washington.

The Atlanta Fed president added to recent warnings by Fed officials and others about possible regional U.S. housing bubbles. Investors gambling that housing prices will soar indefinitely are likely to be disappointed, he said.

"There are some local markets, especially in coastal Florida, where I've heard stories for more than a year about behavior that's got to be characterized as nothing other than speculation," Guynn said it response to questions after his speech.

"It makes me very uncomfortable," he added. "Some buyers, some builders, some lenders are going to get burned, could very likely get burned, in some of those local markets."

Guynn's remarks echoed the caution that Fed Chairman Alan Greenspanoffered last week to Americans who speculate in real estate.

On Friday, Greenspan said he saw signs of "froth" in housing markets though he did not characterize it as a worrying national issue. "We don't perceive that there is a national bubble but it's hard not to see ... that there are a lot of local bubbles," Greenspan told the New York Economic Club.

One factor fueling the booming pace of home building and sales of both new and existing homes is that long-term interest rates including for mortgages have remained low by historical standards and have even come down.

That has happened despite the Fed's current rate-rising campaign, which has taken its federal funds rate up eight times in quarter percentage point increments to a current level of 3 percent. Generally, longer rates follow short rates up or down but the tie between the two has been looser this time.

"I've certainly been among those that's been surprised that the usual pattern of longer-term rates at least partially following short-term rates up has not shown itself this time," Guynn said.

One possible explanation is that financial markets believe inflation will remain low so they may be adding in a smaller "inflation premium" to longer-term loans, Guynn said, adding "If that's the case, it's a very happy development."

Guynn said that while he sees no signs of an imminent or substantial pickup in inflation, policy-makers will need to be especially sensitive to new data and new developments in prices.

"We are approaching an increasingly uncertain time for monetary policy," Guynn said.

Guynn said the U.S. economy is on a solid growth path and has the resilience to adapt to further increases in interest rates.

"Our economy has ample strength to withstand further removal of accommodative monetary policy -- in my view, a step that is needed to sustain economic growth," he said.

Fed policy-makers worried at their May meeting about increased signs of inflation and evidence of slower growth in the U.S. economy, but agreed short-term interest rates continue to be too low, minutes released on Tuesday showed.

Guynn also called the federal budget deficit a problem that warrants close attention, though he acknowledged monetary policy-makers are powerless to influence it.

"Excessive fiscal spending tends to boost output in the short run but eventually adds risks to our economy and restricts the effectiveness of monetary policy," he said.

The United States logged a record $413 billion budget deficit in fiscal 2004, which ended Sept. 30, and the White House has forecast a fresh record deficit of $427 billion this year. At the same time, the government has reported strong tax revenues in 2005, leading some analysts to trim deficit forecasts.